World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Aug. 17 (Bloomberg) -- U.S. banks tightened standards on all types of loans in the second quarter and said they expect to maintain strict criteria on lending until at least the second half of 2010, a Federal Reserve report showed today.

Most banks cited reduced risk tolerance and “a more uncertain economic outlook” as the main reasons for restricting credit to businesses, with 35.2 percent saying they “tightened somewhat,” the Fed said in its quarterly Senior Loan Officer survey.

The report suggests that lenders and borrowers were wary of taking on more risk until the U.S. economy showed clearer signs of growth. Since the survey, economists have raised their outlook for the economy as data suggested home sales and manufacturing were stabilizing, and the Fed said last week that the economy is “leveling out.”

“The report tells us that credit is not becoming more readily available, but also that the credit freeze is at least moving in the direction of a thaw,” said Carl Riccadonna, senior economist at Deutsche Bank Securities Inc.

The survey of 55 U.S. banks and 23 U.S. branches of foreign banks found that demand for loans continued to weaken “across all major categories” except prime residential mortgages, the central bank said. Two banks, or 3.7 percent, reported eased lending standards to large businesses in the survey, held from July 14 and July 28.

Taking Less Risk

Thirty-seven of 38 banks said a less favorable or more uncertain economic outlook was the reason for tighter credit standards on commercial and industrial loans over the previous three months, while 29 of 37 banks cited reduced risk tolerance as a reason for keeping strict standards on industrial loans.

None of the 51 respondent banks eased standards on prime mortgages in the latest survey, while 39 said demand for mortgages was about the same, moderately stronger or substantially stronger.

“Most banks have woken up to the fact that there is a lot more risk in their loan books than they ever thought possible,”said Joel Conn, president of Lakeshore Capital LLC in Birmingham, Alabama. “That has caused them to recalibrate what their requirements for future lending are going to look like.”

Loan originations by the top 22 banks receiving capital injections from the U.S. government rose 12.7 percent in June to $312.1 billion from a month earlier, the Treasury Department said in a separate report today.

Getting Aid

In its monthly report on the banks getting aid from the Troubled Asset Relief Program, the Treasury said total loan balances averaged $4.30 trillion in June, down 1.1 percent from the previous month. Bank of America Corp. in Charlotte, North Carolina, and Citigroup Inc. in New York are among the banks still receiving aid.

Total home mortgages were nearly unchanged in the first quarter compared with the final quarter of 2008 at $10.4 trillion, according to the Fed’s second-quarter Flow of Funds report. Consumer credit decreased at an annual rate of 5.25 percent in the second quarter, the Fed said Aug. 7 in a separate release.

The Fed today extended by three to six months an emergency program aimed at restarting credit markets, a move that may cushion the commercial real-estate industry from rising defaults and falling prices.

Tighter standards mean less access for consumers to all types of consumer credit. Now we have consumer credit falling at an annual rate of 5.25%! That is faster than the following charts that were last updated on 8/7/09… This chart shows total consumer credit expressed in change from a year ago in billions of dollars:

Here’s the total consumer credit outstanding expressed in yoy percent change. While it may not look that dramatic, note that the rate of credit destruction is faster than at any time since the early 1940s:

This is a chart from the Fed’s Monetary Trends. It is a close in look of the percent change from a year ago going back to 1992.

Contracting credit is a central banker’s worst nightmare. Again, credit dollars are much more numerous than real dollars and thus a contraction in credit does not create a growing or inflationary environment.

Oh, I know what all you good consumers are thinking… “hey man, don’t me down!”